Closing Recap

Friday, July 23, 2021

Equity Market Recap

·     New record highs for the S&P 500 index, Dow Jones Industrials and Nasdaq Composite as majors advance for a 4^th straight day led by earnings momentum in large caps. The Smallcap Russell 2000 underperformed, but still finished with a weekly gain of around 2%. Investors remain very bullish into the busiest week of quarterly earnings, with the path of least resistance to the upside as more than one third of the S&P 500 is set to report quarterly results next week, headlined by the four largest U.S. companies by market value (AAPL, MSFT, AMZN, GOOGL) as well as Facebook, Tesla, Boeing, and many others. Earnings dominated headlines today with social media giants SNAP, TWTR rising after better results/guidance, ahead of FB earnings next week. Meanwhile, the macro picture which weighed on sentiment late last week and Monday, took a back seat as recent coronavirus variant spreading concerns, inflation fears, debt ceiling limit at end of month, and lack of deal progress on infrastructure package has failed to dent any market optimism following the strong start to earnings season (over 85% beat rate).

·     The Dow Jones Industrial Average closed back above the 35,000 level after having traded above that threshold earlier this month but failed to close above it, ending at a record 34,996.18 on July 12. The finish above 35,000 marks the 69th trading days after its first close above 34,000, making it the slowest 1,000-point rise since the 218-day gap between the run from a close above 29,000 to a finish above 30,000 that ended on Nov. 24, 2020, according to Dow Jones Market Data.

·     Stocks/sector movers: EDU, TAL, GOTU each plunge over 60% at the day’s lows after Bloomberg reports that China is considering turning its tutoring industry into a non-profit business; DIDI falls as much as 20%, other China names PDD, BIDU, JD fall over 5%, and BABA, TCEHY slide around 5% too as the China Internet ETF KWEB dives 10% to 52-week lows and the China ETF FXI slides to 9-mo lows on the crackdowns; SNAP surges over 20% to new record highs on a strong earnings report for the 2nd time in the past 4 quarters and TWTR jumps on its beat with strong ad growth to lead social media names higher – FB soars to record highs ahead of its earnings next week, PINS, ETSY also outperform; AXP climbs to ATHs on its revenue beat, while COF only slightly higher and SIVB slightly lower despite both also posting beats in financials; INTC sinks to 6-month lows and HON slips despite both posting quarterly beats with better full-year outlooks in earnings among other Dow components; SAM plummets after a massive Q2 miss and weak guidance on soft hard seltzer sales draws a downgrade from Goldman; SKX spikes to record highs after its beat-and-raise; SBUX makes new ATHs after Baird upgrades on near-term upside.

·     This week saw bearish sentiment rise above the historical average for the first time in 24 weeks, according to the latest survey from the American Association of Individual Investors (AAII), while bullish sentiment declined again, falling to a 10-month low. Bearish sentiment – expectations that stock prices will fall over the next six months – rose 3.8 percentage points to 30.6%. Pessimism was last higher on Feb. 3, 2021 (35.6%), the survey showed. The historical average is 30.5%. Bullish sentiment – expectations that stock prices will rise over the next six months – dropped 5.5 percentage points to 30.6%, the survey showed. Optimism was last lower on Sept. 30, 2020 (26.2%). The historical average is 38.0%.

Economic Data:

·     Markit July U.S. PMI Composite Flash reading at 59.7 vs. 63.9 prior, the Manufacturing PMI at 63.1 vs. 62.1 consensus and 62.6 prior while Services PMI 59.8 vs. 64.6 estimate and 64.8 prior

Commodities; Currencies and Treasury’s

·     Oil prices rise as WTI crude up $0.16 or 0.22% to settle at $72.07 per barrel, ending near the best levels of the day (off lows $71.39), managing to eke out a 0.4% gain for the week. Baker Hughes weekly total rig count rose 7 to 491, with oil rigs up 7 to 387, and gas rigs unchanged at 104 – oil rigs added for 4th week in a row. Gold prices slip -$3.60 or 0.2% to settle at $1,801.80 an ounce, ending the week with a loss of roughly -0.7% as the dollar posts its second week of gains.

·     Longer-term Treasury yields edge higher with the 10-year above 1.28%, up from Thursday’s 1.264%, and weekly lows sub 1.13% as strong corporate earnings boost confidence on the economy despite setbacks from the Covid-19 Delta variant. The weak demand for bonds comes as stocks rally, with the S&P heading for a weekly gain.

·     The U.S. dollar posts its second week of gains after a turbulent few day when currencies were buffeted by shifting risk appetite, with the market’s focus now on next week’s Federal Reserve meeting. For the week, it is up 0.2%, after rising 0.6% previously, off 3-1/2-month highs of 93.194 hit on Wednesday. Dollar jumped to nearly 2-week highs around 110.60 vs. the Japanese yen. So far in July, the dollar has gained 0.6%, after rising 2.8% in June.

Sector News Breakdown

Consumer

·     Retailers; SKX rises in footwear space as Q2 profit and sales easily top consensus and guides both Q3 and year EPS/revs above views while also posted a record gross margin of 51.2%; NKE tgt raised to $195 from $150 at Oppenheimer as believe NKE enjoys further room to run; strength this week is discretionary sector ahead of expected Back to School shopping.

·     Auto sector; MGA to acquire VNE for $31.25 per share in cash, representing a total value of $3.8 billion, and an enterprise value of $ 3.3 billion, inclusive of Veoneer’s cash, net of debt and other debt-like items as of March 31, 2021; NKLA files to sell 1.68M shares of common stock for holders; VWAGY said it expects July sales In China to be impacted by chip shortage, which might ease toward end of Q3; DIDI plunges again as recent report that China is weighing serious penalties for the ride-hailing giant, as regulators considering a fine, suspension of certain operations or introduction of a state-owned investor; GNTX drops as 2Q net sales miss ests; CCIV stockholders approve Lucid merger; GM issued a new recall for nearly 69,000 Chevrolet Bolt electric vehicles (EVs) worldwide for fire risks after reports of two new fires.

·     Services; China education sectors crushed (TAL, EDU, GOTU) on reports China will turn its vast private tutoring industry largely into a not-for-profit sector in a harsher-than-expected crackdown. News of the policy change, which also restricts foreign investment in the sector, threatens to decimate China’s $120 billion private tutoring industry; the recent crackdown from China on U.S. listed stocks continues to depress China ADRs (BIDU, BABA, JD, TCEHY)

·     Housing & Building Products; NWHM to be acquired by funds managed by affiliates of Apollo Global Management with a purchase price of $9.00 per share in cash in deal valued at $173M; LL tgt cut to $20 from $22 at Loop and maintain Hold rating after adjusting model for expectation for a more prolonged period of supply-chain related cost pressures in H2; LOW filed mixed shelf offering; in furnishing, ETH prelimQ4 EPS $0.72-0.74 vs consensus $0.65 with consolidated net sales $178.3M vs consensus $177.9M; retail segment written orders +105.0% y/y; strong outperformance early for LOW and HD in home improvement retail

·     Consumer Staples; in beverages, SAM shares tumble after missing both the top and bottom line for Q2 (EPS $4.75 vs. est. $6.69; Q2 revs $602.8M vs. est. $657.6M) and lowered its year outlook (FY21 non-GAAP EPS view to $18.00-$22.00 from $22.00-$26.00; KMB weak Q2 results weigh as the company was hit by a double whammy of weaker tissue demand and skyrocketing input costs, as the co lowers its forecasts for 2021 adj EPS to between $6.65-$6.90, from $7.30-$7.55 per share (PG earnings next week) – though shares rally with broader mkt; MNST upgraded to Buy at Citigroup saying following a strong +46% move in 2020, MNST’s share price is up just 1% YTD in 2021, which is weaker than almost every other beverage company under our coverage and represents a sharp underperformance relative to the S&P 500’s +16% YTD

·     Restaurants; Baird upgraded SBUX to Outperform and raised their PT to $142 from $117 as recent U.S. coffee category data points have strengthened confidence that it can show upside to near-term comps/EPS estimates; JPMorgan downgraded DPZ to Neutral, saying it is time to lock-in profits with shares up ~117% (vs ~54% SPX) since March 2019 and about 60% (vs SPX up ~15%) since 2/26; TACO reported Q2 adj EPS 16c vs est. 11c on revs $125M vs est. $122.79M, system-wide comp sales +17.8%, company-operated comps +18.3%, franchise comps +17.2% for the quarter, and expects system-wide new unit growth to achieve 5% in 2023 led by franchising; PF Chang’s in early talks regarding an IPO in a potential $1B deal as soon as this year, Bloomberg reported, while also noted California Pizza Kitchen’s owners considering potential sale or IPO.

Energy

·     Energy stock movers; Oil edged further below $72 a barrel on Friday but was on track to end the week little changed after a surprising recovery from Monday’s slide, underpinned by expectations that supply will remain tight as demand recovers

·     Oil equipment and services; SLB reported a rise in Q2 net income as a rebound in crude prices revived demand for the company’s oilfield services and related equipment (Q2 EPS $0.30/$5.63B in revs vs. est. $0.26/$5.5B); BOOM drops after posting Q2 sales and profits below Street consensus, and guides Q3 revs $70-$73M, missing the $73.2M estimate as expects gross margin of 24%-26%, down from 26% in Q2, saying potential decline relates to expected increase in N.A. sales vs higher margin int’s sales; in renewable energy, TPIC falls after co sees hit to FY21 adj. EBITDA from higher raw material costs, policy uncertainty saying sees Q2 Ebitda $70 mln-$85 mln vs previous estimate of $110 mln-$135 mln

Financials

·     Bank movers; financials (along with energy) were the worst performers in the S&P today as Treasury yields remain depressed and investors look for more growth opportunities; RF posted Q2 EPS beat on in-line revs with NIM 3.31%; ACBI to be acquired by SSB in an all-stock transaction valued at $542M that values ACBI at $26.43 per share (ACBI holders will receive 0.36 share of SouthState); in insurance, CB added to Wells Fargo Signature Picks portfolio with an initial weighting of 2.5%; ZION announces $125M buyback for Q3, boosts dividend

·     Consumer Finance; AXP hits record highs after Q2 EPS $2.80 easily tops the $1.66 consensus estimate as qtrly total provisions for credit losses benefit of $606M vs provision expense $1.56B and says card member spending exceeded pre-pandemic levels in June; LPRO downgraded to Neutral from Buy at Goldman Sachs following recent share price outperformance and based on our revised outlook for OEMs (notes since added LPRO to the Americas Buy List on July 14, 2020, the shares are +123% vs S&P500 of 37%); COF another strong earnings report in credit card space

Healthcare

·     Pharma movers; PFE and BNTX to Provide U.S. Government with an additional 200 million doses of Covid-19 vaccine to help meet continued need for vaccine supply in the U.S./dose deliveries for new order expected to occur from October 2021 through April 2022; NRXP posting a second day of double-digit gains, on plans to make a commercial formulation of a still experimental Covid-19 therapy in million dose quantities

·     Biotech movers; ADVM tumbles after saying late yesterday it will no longer develop its experimental gene therapy, ADVM-022, for treatment of diabetic macular edema (DME) – downgraded at Cantor with $3 tgt; ALZN said it receives positive results for al002 in GLP toxicology study using a transgenic mouse model of Alzheimer’s disease; MRNA conducting a phase 2/3 study, called Kidcove study, of mrna-1273 in children ages 6-mo to less than 12 years; CRBU opens at $17.65, after IPO priced at $16 per share

·     MedTech Equipment; MDGS surged after saying pre-clinical data from a study of biological gel being developed by a part-owned private company has the potential to reduce the risk of an infection with human coronavirus and may also prevent Covid-19; EW tgt raised to $125 at Cowen saying intra-quarter checks have increased our confidence in the TAVR market’s recovery pace and driven our view that EW s 2Q set up is highly favorable

Industrials & Materials

·     Transports, Industrial & Machinery; HON Q2 EPS $2.02 vs. est. $1.94; Q2 revs $8.81B vs. est. $8.63B; raises FY21 adj EPS view to $7.95-$8.10 from $7.75-$8.00 (est. $8.01) and boosts FY21 revenue view to $34.6B-$35.2B from $34B-$34.8B (est. $34.93B); AAL upgraded to Buy at Seaport on increased comfort around corporate revenue, transatlantic revenue, costs and the firm’s plan for derisking its balance sheet

·     Metals & Materials; CBT was upgraded to Overweight at JPMorgan noting shares are down about (10%) since they last wrote on Cabot in the middle of June – and since, the company’s earnings prospects have not materially altered since that time, in our opinion; beverage can makers active (CCK, BLL) as SAM substantially cuts its full-year growth forecast on slowing hard seltzer category – CSFB notes the significant growth of the hard seltzer category in recent years has been a (if not the) major driver of the surge in N.A. beverage can demand since 4q18

Technology, Media & Telecom

·     Internet; social media stocks jump on better results as TWTR posted higher revenue growth than expected, as ad revs rose 87% YoY to $1.05B, topping the $909M est. and reported 206Mmn monetizable daily active users (mDAU) for Q2, in-line with ests; SNAP surges as qtrly rev and user growth beat analysts’ estimates, with Q2 revs jumping 116% to $982M, topping the $846M estimate as daily active users rose 23% to 293M (vs. est. 290M) and guided Q3 revs above views ($1.07B-$1.09B vs. est. $1.01B); shares of PINS, FB rise ahead of earnings next week

·     Semiconductors; INTC slides despite Q2 results topping expectations amid continuing PC strength and a data center recovery (2Q adj EPS $1.28 vs est. $1.05 on revs $18.5B vs est. $17.8B) and also raised its year outlook, while guiding Q3 revs and EPS in-line with estimates; TSM is reportedly ramping up capacity and prioritizing automotive chips after signing multiple contracts through 2022, Digitimes reported

·     Hardware & Software movers; big week coming up for AAPL as earnings expected mid-week; in Internet security, Keybanc raises tgts on PANW, OKTA, and FTNT and SW rating on CHKP following strong 2Q security channel checks and results from both the KBCM 2Q21 VAR and CIO Surveys; SCKT shares spike after reported EPS of $0.27 vs year-ago loss of $0.13 while revenue more than doubled to $5.95M vs $2.7M in year-ago quarter